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Break-Ups and Bitcoin: The Treatment of Cryptocurrency in Family Law Proceedings
Cryptocurrency – which at this point needs no introduction – is making headlines again following the reveal that Tesla purchased 1.5 billion USD worth of Bitcoin in January[1]. Tesla’s purchase is indicative of a broader phenomenon: investors have been putting an increasing amount of money into cryptocurrencies. This blog considers the family law issues that are created by this novel type of asset, issues which Canadian courts are just starting to consider.
What is Cryptocurrency?
Put simply, cryptocurrency is a digital asset that uses a shared ledger (a “blockchain”) to record and manage its issuance and transfer between parties. This ledger is decentralized and shared between many computers, which removes the need for any third-party intermediary, such as a financial institution, to oversee it.
Cryptocurrencies are characterized by high-price volatility when compared to traditional investments. For example, there has been a day during which the price of Bitcoin has dropped by 38 percent[2], and there has been a year during which units of the “Verge” cryptocurrency increased in value by more than 1.5 million percent[3].
Family Law Issues
Owing to its unique structure and novelty, and to the fact that it was designed to evade governmental regulation, cryptocurrency creates interesting family law issues. As stated by Justice Nakonechny, cryptocurrency is “clearly a volatile, emerging, intangible source of wealth which the courts will have to grapple with more frequently in future”[4].
A major issue with cryptocurrency is its anonymity. Because it is impossible to identify the owner of a Bitcoin-type cryptocurrency without knowing the owner’s unique passcode, a dishonest party can use these investments to hide their assets. Aware of cryptocurrency, Ontario courts have already ordered child support payors to disclose their crypto holdings on more than one occasion[5]. This type of disclosure can be particularly sensitive, and it may need to be presented in a redacted form so that hackers cannot access the cryptocurrency accounts being disclosed[6]. Even if it is later discovered that a party is hiding these assets, the associated encryption makes it so that the accounts can’t be accessed by anyone without the passcode. Cryptocurrency can also be quickly and easily transferred to a new account at any time before it can be seized.
Cryptocurrency poses problems with valuation, which makes it difficult to accurately and fairly divide these assets in the event of a marital breakdown. Its wild price fluctuations complicate the process of determining its value on the “valuation date” of a divorce or separation. There are also many different types of cryptocurrency, which may necessitate the use of a specialist valuator who is familiar with a given type. Once valuation occurs, for the purposes of property division, cryptocurrency is to be treated like any other investment. This means that the losses sustained, or the gains made, from cryptocurrency investments should be split between both parties to a divorce[7].
Cryptocurrency can also be used to generate income, which can affect the income earner’s support obligations. If a support payor is generating, or “mining”, cryptocurrency, then the generated value may be included in their income. The sale of cryptocurrency may also create income that can affect a payor’s support obligations[8].
Family Law changes as quickly as the world around it. For up-to-the-minute expertise, contact us at McKenzie Lake Lawyers.
This blog was written by Family Lawyer Hilary Jenkins and articling student Keenan Fast.
[1] Bitcoin Price Rockets After Elon Musk’s Tesla Reveals It Bought $1.5 Billion Worth Of Bitcoin, Forbes: online, <https://www.forbes.com/sites/billybambrough/2021/02/08/bitcoin-price-rockets-after-elon-musks-tesla-reveals-it-bought-15-billion-worth-of-bitcoin/?sh=4a144df65b63>.
[2] Bitcoin’s ‘Most Volatile Day’ Prompts Exchanges to Make Changes, Bloomberg: online <https://www.bloomberg.com/news/articles/2020-04-28/bitcoin-s-most-volatile-day-prompts-exchanges-to-make-changes>.
[3]3 Cryptocurrencies That Rose by More Than 100,000% in 2017, The Motley Fool: online <https://www.fool.com/investing/2017/12/29/3-cryptocurrencies-that-rose-by-more-than-100000-i.aspx>.
[4] M.M.D. v J.A.H., 2019 ONSC 2208 (CanLII) at para 140.
[5] M.M.D. v J.A.H., 2019 ONSC 2208 (CanLII) at paras 138-141; Wu v Di Iorio, 2021 ONSC 2331 (CanLII) at para 9.
[6] M.M.D. v J.A.H., 2019 ONSC 2208 (CanLII) at paras 138-141.
[7] T.E.A. v R.L.H.C, 2019 BCSC 1042 (CanLII) at para 283; Nissen v Nissen, 2019 ABQB 717 (CanLII) at para 57.
[8] Hauber v Sussman, 2020 ONSC 6695 (CanLII) at paras 5 and 48.
